Repercussions of GST fraud on your business

The Goods and Services Tax (GST) Act, the biggest indirect tax reform of independent India, aims to improve the ease of doing business throughout the country. With only one tax on the supply of services and goods, the regulatory environment is expected to operate more efficiently, which will in turn facilitate starting and operating a business.

Amidst this reform, companies will need to make every effort to comply with all provisions of the act, which deals very harshly with defaulters. Along with high penalties, the act gives officers special powers of prosecution and any offenses stand to directly affect a company’s market goodwill and brand.

Company managers should carefully track all regulations under GST aimed at preventing fraud so that they can be proactive in preventing fraudulent activities inside their companies. 

Charging incorrect tax rates 

In all circumstances, businesses must only charge GST according to the rates prescribed by the GST Council. Under no circumstances can a business charge GST at a rate higher than that prescribed by the council.

The council has exempted some goods and services from GST obligations. Business cannot increase prices to account for the lack of GST on those goods and services. 

To help businesses comply, the government has provided a list of all GST rates that businesses should charge for goods and services. The government has also launched an app called GST Rate Finder that makes it very easy for consumers to verify whether a business is charging the correct tax rate or not. 

Tip: Make sure your billing system picks up the correct tax rate at the time of invoicing. Tax rates change every now and then, so your billing system must be capable of updating on the spot. High penalties and even prosecution can result from charging consumers an incorrect amount of tax. 

Charging GST over MRP

A shopkeeper cannot charge GST over and above the maximum retail price (MRP) of a product. The GST amount must be included in the MRP. If any shopkeeper is caught charging GST over MRP, the penalty can range from Rs. 2000 to 25,000. If the shopkeeper repeats the offense, the amount will double.  

Tip:  Companies operating in the fast moving consumer goods (FMCG) industry must include GST in the MRP of the product, and all shopkeepers should be cautious not to charge any amount in excess of the MRP.

Charging the incorrect type of GST on invoices

In many cases, companies will charge State GST (SGST), Central GST (CGST), and even Interstate GST (IGST) on their invoice, which is incorrect. Companies must take into account the place of supply, and then charge the correct type of GST accordingly. 

Tip: Consider the location of the recipient and apply the appropriate place of supply rules. If necessary, companies should seek advice from consultants to help avoid any activities that may be considered fraudulent.

Charging GST immediately after applying to be a registered taxpayer 

Companies can only charge GST if they are registered taxpayers under the GST Act. Sometimes companies will start collecting GST from consumers immediately after applying for registration, however this is considered fraudulent.

Tip: You may begin charging GST once you have received a GST identification number (GSTIN). Consumers can verify GSTINs through the GST portal, so be sure to use the correct GSTIN to avoid penalties or even prosecution.  

Claiming the correct input tax credit or refund amount

Currently, the government is approving GST refunds and input tax credit (ITC) on a provisional basis as per details mentioned in form GSTR-3B. However, there are hefty penalties if details on GSTR-1 forms don’t match those on GSTR-3B. Companies will receive a penalty of 100 percent of the amount of tax that was evaded. Fraudulent claims for refunds of GST or ITC may face prosecution.

 Tip: Companies should ensure that their claims for refunds are accurate and not in excess of what is justified under the GST Act. It is very important that GST return filing software be competent enough to keep track of all information filed in GSTR-3B vis-à-vis GSTR-1 and -2. 

Cognizable offenses

Cognizable offenses are those in which specially empowered officers have a right to arrest without warrant, and initiate an investigation without permission of a court. 

The following frauds have been placed into the cognizable offenses category under the GST Act: 

1. Evading tax of more than Rs. 5 crores

2. Incorrectly availing ITC of more than Rs. 5 crores

3. Incorrectly claiming refunds of more than Rs. 5 crores  

Fraud and damage to goodwill of business

Government is taking the necessary steps to curb fraudulent activity, and every business is on its radar. If a business is found indulging in any fraudulent activities, its GST compliance rating may get badly hit, which could severely affect the market goodwill of the business.

Therefore, businesses need to make every effort to file accurate GST returns and comply with all GST provisions. These efforts may include: 

• Strengthening internal controls on a management level 
• Reformulating policies in order to prevent activities that are or could be perceived as fraudulent
• Using GST compliance software in order to improve the accuracy of details at each step of the GST return filing process 

Avalara is an experienced application service provider (ASP) and partner of authorized GST Suvidha Providers (GSPs). To understand how our cloud-based application, Avalara India GST, can help you with GSTR-1 to -9, contact us through https://www1.avalara.com/in/en/products/gst-returns-filing.html.